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Can I Form a California Corporation to Get Rid of My Personal Credit Card Debt?

The short answer is “no.” You cannot form a California corporation to get rid of personal credit card debt. Any attempt to shift personal debt into a new corporate entity can be seen as an effort to commit a fraud on creditors. This is true even if the personal debt is exclusively related to a business that you have been running as a sole proprietorship. If you are transitioning from a sole proprietorship to a corporation for running your business, advice and counsel from a good San Diego corporate attorney can help ensure the transition is done correctly and legally.

Moreover, as a practical matter, it is unlikely you will succeed because you will need the agreement of your lenders or credit card companies to shift debt from yourself personally to a new corporation. Credit cards, lines of credit, and other loans are tied to your name personally and to your personal tax identification number (that is, your social security number). Shifting the debt to a newly formed corporation essentially means getting the loans associated with the new corporate tax identification number.

That requires the agreement of the lenders and, as noted, their agreement is unlikely without a personal guaranty. Lenders typically require personal guaranties from the owners when dealing with new corporations. This is because the new corporation does not have a “track record” and extending credit is a high risk. Thus, lenders often ask for personal guaranties. As a result, you still end up being personally liable for the business debts.

The other concern is the whether there has been any commingling of personal and business debt. If there has been any commingling, then shifting the debt from you personally to the corporation is potentially an even more serious legal issue. Commingling is using a credit card or line of credit for both personal and business purchases. If the issue ever came before a judge, any commingling would be a “red flag.” If, on the other hand, the business credit card or line of credit was used exclusively for the business and you have the receipts and purchase records to prove it, then maybe it can be done. But, again, as a practical matter, your creditors will need to agree and, again, as a practical matter, you are unlikely to avoid personal liability.

That being said, over a period of a year or eighteen months or longer, with careful planning, you can begin building a business credit rating that will help you obtain business credit. That is, the credit cards or lines of credit will be started and opened in the name of the corporation using the corporation’s tax ID number.

Once a business credit rating is established, then business credit can be used to operate the business while you use your personal income to pay down your personal debt. Over time, then, your personal debt decreases while the business debt increases. But great care must be taken to use only your personal funds to pay your personal debt. Do not write a check from the company account. Rather, pay yourself a salary or a wage, deposit that into your personal account and then pay down your personal credit cards. The process takes time, requires attention to detail, must be done carefully and be done without compromising the corporate formalities. This sounds complicated, but it is necessary to maintain your corporation in good standing. Remember that your new corporation is a separate legal entity from yourself. You need to treat it as something separate.

Contact San Diego Corporate Law Today

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides a full panoply of legal services for businesses including contract drafting and review and help with the formation of corporate entities of all types. Mr. Leonard has been named a “Rising Star” by SuperLawyers.com. Call Mr. Leonard at (858) 483-9200 today or contact him via email. Like us on Facebook.

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Michael J. Leonard, Esq., is an award winning attorney whose practice focuses on corporate, securities, contract, and intellectual property law for small and medium businesses. In his practice, Mr. Leonard routinely assists his clients with the formation of business entities, financing through the sale of debt and equity securities, mergers and acquisitions, contract drafting and review including commercial leases, and establishment and licensing of trademarks, copyrights, and trade secrets.